It's the economy, stupid
How much does the former merchant banker who heads our Government know and when is he going to reveal his cards? As our best and brightest financial minds gather to brainstorm at the Jobs Summit, this question needs to be asked: how good are traditional economic models now under what economist George Soros has called the end of unregulated capitalism? As the increasing toll of late nights worrying furrows the brows of both our Prime Minister and our Minister for Finance, it is becoming clear that nation states are used to regulating price stability in much more calmer conditions and are not sure quite how to deal with this level of fluctuation.
The faith of many people in the ability of unregulated business to make sane decisions has been dented in the US by the series of high profile fraud cases and allegations of insider trading that have been mirrored around the world. The collapse of companies such as Lehman Brothers, Fanny May and Freddie Mac in the US have been followed by a slew of other companies, exposing the fragility of this house of cards we have built. In America, the middle classes who have borrowed beyond their wealth have been turfed out of their homes through foreclosures causing tent cities across the nation. The damage this housing market's over-extension has caused has sent ripples of fear through other countries, the globalised nature of our markets meaning that the import and export trades of very few markets are safe.
A few days ago, we witnessed the collapse of the Anglo Ireland bank in a scandal that Gene Kerrigan argued in The Independent would inevitably lead to public strikes against the Government for its protection of the wealthy players rather than the people who lost their homes. Just over two months ago, we witnessed Iceland go bankrupt because the krona could no longer compete against stronger currencies on the international market. The news of late from other countries is little better: Japan is predicting a 4.1% contraction in the GDP causing the Liberal Democrat Party to issue suicide warnings, particularly as the people losing their jobs first appear to be those on casual contracts and limited hours. Many regions of Eastern Europe remain under threat of economic collapse, with the Ukraine, Latvia, Hungary and Romania asking for loans from the IMF over the last few months. Having finally made progress under the global credit boom, these countries teeter on the brink of bankruptcy. In India, we have seen the losses of more than two million jobs in the last four months. Even China's economy is slowing, with the Government just declaring a US$1 billion bailout for China Eastern Airlines.
While Key and English keep reiterating that we have somewhat of a buffer due to the more controlled style of lending that our Aussie banks have procured, the problem is that the structure of our economy is not immune to the whims of the fluctuating economy of other nations. For example, the Australians are watching the Japanese markets with a keen eye at the moment as it affects nearly a quarter of their export market. Under these kind of economic conditions, it becomes a Government's job in tandem with the Reserve Bank to attempt to regulate price stability and keep consumer confidence up to encourage spending. As George Bush argued after 9/11, we need to keep going to Disneyland (as cited in Spigel, 2004: 231).
However, as Soros so acutely highlights, how do we keep going to Disneyland when the wheels have effectively fallen off the machine? Stimulus packages in the US did little to quell the collapse of the sub-prime housing markets despite tax paying Americans receiving rebates. The problem is, as the debates over Bush's stimulus package illustrate, tax rebates tend to either be spent very quickly or saved. The former result is simply an aspirin to a market crippled at the knees and does not fix the problem; the latter is an anathema to its purpose as the money does not circulate.
It is hard to see how such a flawed system can be fixed by such measures without radical transformation of the terms under which capitalism works. While many exercise faith in his ability to manage the situation due to his background as a merchant banker for Merrill Lynch, recent revelations regarding Wall Street politics weaken this claim to credibility. As Michael Lewis' argues in his autobiographical work Liar's Poker, the streets paved with market gold were often frequented by players who had little knowledge of economics, the business environment encouraging snake oil merchants who had little regard for the confidence they inspired in stakeholders. After writing a memoir on how he made it on Wall Street without knowing much about the system itself, Lewis was alarmed to find that people were reading it as a manual on bluffing with big money.
Moreover, there has been increasing focus over the last few weeks on how many of the basic premises on which economic decisions have been made are fundamentally flawed. For example, Wired.com examines how the complex equations on risk designed by David X. Li and adopted by economists around the world are fundamentally flawed. In the desire to create a definitive number for the essentially unquantifiable variable of risk, financial institutions have threatened the very foundations of our society. One in five mortgage owners in the US are now in negative equity and economists such as Soros argue that the fall-out from the "sub-prime detonator" will get much worse. In the US, the Federal Reserve sees the recession as continuing well into 2011. As Gordon Campbell highlights, some economists are predicting the US recession could actually last as long as till 2015. The bottom line is that it is difficult for the property market to stabilise with rapidly rising levels of unemployment.
In the midst of this global chaos, we elect a leader who is one of the people who has helped get us into this situation. Despite Key's apparent expertise at the economy, all we have had is policies that are targeted at saving cash for the middle classes by providing tax cuts and easing regulatory restrictions around small businesses. This did not work in the US and there is no guarantee it will work here. As Rob Fyfe points out, tax cuts are unlikely to get the economy moving. The middle classes are more likely to save that money and for a tax stimulus to work it must be targeted at the people who are most likely to spend it. As his opponents have pointed out, the small business changes just make it easier to fire people who are likely to lose their jobs anyway during a recession.
Apparently we are supposed to vest our faith in the patriotic myths that keep falling like verbal diahoerrea from Key's lips: "We're not a nation of whingers or slackers", despite our size "we are gritty" and there will be a moment where we emerge from this crisis as victorious due to our unnatural ability for innovation by virtue of being born New Zealanders. These problems will be solved by Key meeting with the old boys club at the Jobs Summit (a meeting that even the ACT Party recognises is playing with tiddlywinks while the backyard burns).
Diverting us to the minutae of the economy and relatively small scale jobs creation plans is on the one hand good for consumer confidence, perhaps slowing the rate of unemployment. On the other hand, it is time for some serious planning. It is clear that in order for NZ to emerge in a better position from this recession, there is a need to overhaul the system. Repeating lessons from Economics 101 will do little to protect us from a situation that is already arguably too out of control for the Government and Reserve Bank to effectively steer. The only way from here, at least for the short term, is down. But one would hope that in the long term, strategies are introduced that limit the risk of our people by regulating the free market further. For while the market in theory eventually rebalances itself, we should take this as a stern lesson of the human cost in letting capital flow with little regulation.